Chapter 8 

TIME VALUE OF MONEY 

1.
(i)
A x PVIFA ​(12%​, ​5) =​ 15,000,000

A x 3.605 = 15,000,000

15,000,000
A = = 4,160,888
3.605

(ii)

Year Principal Installment Interest Principal

(beginning) repayment
1 15,000,000 4,160,888 1,800,000 2,360,888
2 12,639,112 4,160,888 1,516,693 2,644,195
3 9,994,917 4,160,888 1,199,390 2,961,498
4 7,033,419 4,160,888 844,010 3,316,878

2,961,498
∴ The required proportion = = 0.71
4,160,888

2.

The doubling period as per the rule of 69 is :

69
0.35 +
​r

69
= 0.35 + = 5.66 years
13

3.

1,000,000
Annual installment = = 298,329
3.352

Loan Amortisation Schedule

Year Beg. Instalment Interest Principal Balance
repayment
1 1,000,000 298,329 150,000 148,329 851,671
2 851,671 298,329 127,751 170,578 681,093

170,578 / 298,329 = 0.572 or 57.2%

4.​ Value 10 years hence of a deposit of Rs.20,000 at various interest rates is as

follows:

r = 4% FV​5 = 20,000 x FVIF (4%, 10 years)

= 20,000 x1.480 = Rs.29, 600

r = 6% FV​5 = 20,000 x FVIF (6 %, 10 years)

= 20,000 x 1.791 =Rs.35, 820

r = 8% FV​5 = 20,000 x FVIF (8 %, 10 years)

= 20,000 x 2.159 =Rs.43, 180

r = 9% FV​5 = 20,000 x FVIF (9 %, 10 years)

= 20,000 x 2.367 =Rs. 47,340

5.
​Rs.32,000 / Rs. 2,000 = 16 = 2​4

According to the Rule of 72 at 6 percent interest rate doubling takes place

approximately in 72 / 6 = 12 years

So Rs.2, 000 will grow to Rs.32, 000 in approximately 4 x 12 years = 48 years

6.
In 14 years Rs.5, 000 grows to Rs.20, 000 or 4 times. This is 2​2 times the initial deposit.
Hence doubling takes place in 14 / 2 = 7 years.

According to the Rule of 69, the doubling period is .35 + 69 / Interest rate
We therefore have
0.35 + 69 / Interest rate = 7
Interest rate = 69/(7-0.35) = 10.38 %

7.
In 18 years Rs.10, 000 grows to Rs.80, 000 or 8 times. This is 2​3 times the initial
deposit. Hence doubling takes place in 18 / 3 = 6 years.
 According to the Rule of 69, the doubling period is 0.35 + 69 / Interest rate. We
therefore have
0.35 + 69 / Interest rate = 6

Interest rate = 69/(6-0.35) = 12.21 %

8.

Saving Rs.5000 a year for 3 years and Rs.7000 a year for 7 years thereafter is equivalent to
saving Rs.5000 a year for 10 years and Rs.2000 a year for the years 4 through 10.
Hence the savings will cumulate to:
5000 x FVIFA (8%, 10 years) + 2000 x FVIFA (8%, 7 years)
= 5000 x 14.487 + 2000 x 8.923 = Rs.90281

9.
Let A be the annual savings.

A x FVIFA (10%, 5years) = 2,000,000

A x 6.105 = 2,000,000

So, A = 2,000,000 / 6.105 = Rs. 327,600

10.
The present value of an annual pension of Rs.120, 000 for 20 years when ​r =
10% is:
120,000 x PVIFA (10%, 20 years)
= 120,000 x 8.514 = Rs.1, 021,680

The alternative is to receive a lumpsum of Rs 1,000,000

Rahul will be better off with the annual pension amount of Rs.120,000.

11.
The present value of an annual payment of Rs.10,000 for 10 years when ​r​ = 9% is:
10,000 x PVIFA ( 9 %, 10 years)
= 10,000 x 6.418 = Rs.64, 180

The annual payment option would be the better alternative

12.
The present value of the income stream is:
30,000 x PVIF (9%, 1 year) + 50,000 x PVIF (9%, 3 years)
+ 100,000 x PVIFA (9 %, 7 years) x PVIF (9%, 3 years)
= 30,000 x 0.917 + 50,000 x 0.772 + 100,000 x 5.033 x 0.772 =
Rs.454, 658...352 x 0.658 = Rs.152, 395.
13.
The present value of the income stream is:
1,000 x PVIFA (12%, 3 years) + (5,000/ 0.12) x PVIF (12%, 3 years)
= 1,000 x 2.402 + (5000/0.12) x 0.712
= Rs.32,069

14.
To earn an annual income of Rs.240,000 forever , beginning from the end of 6 years
from now, if the deposit earns 12% per year a sum of Rs.240,000 / 0.12 = Rs.2,000,000
is required at the end of 5 years. The amount that must be deposited to get this sum is:
Rs.2, 000,000 PVIF (12%, 5 years) = Rs.2, 000,000 x 0.567
= Rs. 1,134,000

15.

PV( Stream X) = 500 PV( 18%, 1yr) +550 PV( 18%, 2yrs) + 600 PV( 18%, 3yrs) + 650
PV( 18%, 4yrs) + 700 PV( 18%, 5yrs) + 750 PV( 18%, 6yrs)
= 500 x 0.847 +550 x 0.718 + 600 x 0.609 + 650 x 0.516 + 700 x 0.437 + 750 x 0.370 =
2102.6

PV( Stream Y) = 750 PV( 18%, 1yr) +700 PV( 18%, 2yrs) + 650 PV( 18%, 3yrs) + 600
PV( 18%, 4yrs) + 550 PV( 18%, 5yrs) + 500 PV( 18%, 6yrs)
= 750 x 0.847 +700 x 0.718 + 650 x 0.609 + 600 x 0.516 + 550 x 0.437 + 500 x 0.370 =
2268.65

PV (Stream Z) = 600 PVIFA (18%, 6yrs) = 600 x 3.498 = 2098.8

16.
FV​10 = Rs.200,000 [1 + (0.12 / 6)]​10x6
= Rs.200,000 (1.02)​60
= Rs.200,000 x 3.281
= Rs.656,200

17.

B
 C

Stated rate (%) ​8 10 12

Frequency of compounding 6 times 4 times 12 times

Effective rate (%) (1 + 0.08/6)​6​- 1 1+0.10/4)​4​ –1 (1 + 0.12/12)​12​-1

= 8.27 = 10.38 = 12.68

Difference between the

effective rate and stated
rate (%) 0.27 0.38 0.68

18.​ The interest rate implicit in the offer of Rs.600,000 after 8 years in lieu of
Rs.200,000 now is the value of r in the following equation:
Rs.200,000 x FVIF (​r​,8 years) = Rs.600,000

Rs.600,000
FVIF (​r​,8 years) = = 3.000
Rs.200,000

From the tables we find that

FVIF (15%, 8years) = 3.059

This means that the implied interest rate is nearly 15%.

I would choose Rs.600,000 after 8 years from now because I find a return of 15%
quite attractive.

19.
FV​5 = Rs.500,000 [1 + (0.09 / 4)]​5x4
= Rs.500,000 (1.0225)​20
= Rs.500,000 x 1.5605
= Rs.780,250

If the inflation rate is 3 % per year, the value of Rs.780,250, 5 years from now, in
terms of the current rupees is:
Rs.780,250 x PVIF (3%, 5 years)
= Rs.780,250 x 0. 863 = Rs.673,356

20.
The discounted value of Rs.100,000 receivable at the beginning of each year from
2015 to 2019, evaluated as at the beginning of 2014 (or end of 2013) is:
= Rs.100,000 x PVIFA (10%, 5 years)
= Rs.100,000 x 3.791= Rs.379,100
 The discounted value of Rs.379,100 evaluated at the end of 2011 is

= Rs.379,100 x PVIF (10 %, 2 years)

= Rs.379,100 x 0.826= Rs.313,137

If A is the amount deposited at the end of each year from 2007 to 2011 then
A x FVIFA (10%, 5 years) = Rs.313,137
A x 6.105 = Rs.313,137
A = Rs.313,137/ 6.105 = Rs.51,292

21.
The discounted value of the annuity of Rs.120,000 receivable for 20 years, evaluated as
at the end of 7​th​ year is:

Rs.120,000 x PVIFA (12%, 20 years) = Rs.120,000 x 7.469 = Rs.896,280

The present value of Rs. 896,280 is:

= Rs. 896,280 x PVIF (12%, 7 years)

= Rs. 896,280 x 0.452
= Rs.405,119

22.
40 per cent of the pension amount is
0.40 x Rs.10,000 = Rs.4,000

Assuming that the monthly interest rate corresponding to an annual interest rate of 12%
is 1%, the discounted value of an annuity of Rs.4,000 receivable at the end of each
month for 240 months (20 years) is:

Rs.4,000 x PVIFA (1%, 240)

(1.01)​240​ - 1
Rs.4,000 x = Rs.363,278
.01 (1.01)​240

If Mr. ​Tiwari​ borrows Rs.​P​ today on which the monthly interest rate is 1%

P​ x (1.01)​96 = Rs. 363,278

P​ x 2.60 = Rs. 363,278

Rs. 363,278
P = = Rs.139,722
2.60

23.
 The discounted value of the debentures to be redeemed between 6 to 8 years evaluated
at the end of the 5​th​ year is:

Rs.20 million x PVIFA (10%, 3 years) = Rs.20 million x 2.487

= Rs.49.74million

If A is the annual deposit to be made in the sinking fund for the years 1 to 5,
then
A x FVIFA (10%, 5 years) = Rs.49.74 million
A x 6.105 = Rs.49.74 million
A = Rs.8,147,420

24.
Equated annual installment = 2,000,000 / PVIFA(12%,5)
= 2,000,000 / 3.605
= Rs.554,785

Loan Amortisation Schedule

Beginning

Annual

Principal

Remaining

Year
amount installment Interest repaid balance

1 2,000,000 554,785 240,000 314,785 1,685,215

2 1,685,215 554,785 202,226 352,559 1, 332,656
3 1,332,656 554,785 159.919 394,866 937,790
4 937,790 554,785 112,535 442,250 495,540
5 495,540 554,785 59,465 495320 220*
(*) rounding off error